Startling results for April consumer sentiment index surprise economists

Consumer sentiment has gone in an unexpected direction, according to the latest Westpac Melbourne Index



Consumer sentiment has fallen 5.1% this month, from 110.5 in March to 104.9 in April, according to the Westpac Melbourne Institute Index.

Westpac's chief economist, Bill Evans, says the result is surprising.

“The Index had risen by 9.9% over the previous two months and it appeared that, finally, after the Reserve Bank had been cutting interest rates for more than 12 months that the rate cuts and a more settled world economy were gaining real traction with consumers.”

While it was reasonable to expect the recent Index momentum to have slowed over the past two months, Evans says a 5.1% fall ‘was not expected’.

“This result emphasises how fragile consumer confidence has become in the current environment. In fact, the Index is now only 1.5% above its level in November 2011, following the Reserve Bank's first cut in this easing cycle and only 0.6% above the print from last November.”

Evans says that when rate cuts took hold in the previous two cycles, the Index swelled by 37% (2009) and 18% (2002). But he says the recent increase of 9.9%, now being marked down to 4.3%, looks far less convincing.

“Reasons for the April fall are probably best assumed to be around global concerns and an associated correction in the share market. Since the last survey, the ASX had fallen by 4.5%. The equity market probably best captures fluctuations in prospects for the global economy. The disturbing news around Cyprus with associated risks around European stability may have unnerved respondents.”

The media may have also played a part, says Evans, with local coverage around prospects of rising interest rates in the near future and the RBA’s decision to hold rates steady at its April meeting, while widely expected, would not have allayed any concerns about rising interest rates.

“Some other news was generally positive. The report of a huge 71,500 gain in jobs in February should have buoyed confidence around job prospects, while coverage of the housing markets has been registering price increases and prospects for further rises. Later in the week we will be reporting on the survey's results on consumers' expectations for unemployment and house prices.”

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